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So, Vanguard is launching a retail super fund. Again. Frenzied super commentators connvinced this new super fund is going to sweep all before it need to calm down and read some history. Early last year ... So, Vanguard is launching a retail super fund. Again. Frenzied super commentators connvinced this new super fund is going to sweep all before it need to calm down and read some history. Early last year it was reported that Vanguard HQ had announced the manager would no longer offer low-fee, high-profile institutional mandates across Asia Pacific, shifting focus to expanding its retail business. About the same time, Vanguard Australia announced that they're going to have another go running a Down Under super fund. They last tried this in 2001, though by 2012, triggered by the hassles of the Super Stream reforms, closed out and transferred the funds into MLC Wrap Super. But the institutional mandate decision, if that's what it was, was a company-wide multi-country move. Reports said Vanguard would consequentially be closing its Hong Kong and Tokyo offices. Any case, the statement attributed to Vanguard at the time said they'd no longer be offering, not necessarily cancelling, institutional mandates. Sure, Vanguard's Melbourne office may, according to insiders, play a disproportionately influential role in Vanguard's global business. But a global money manager as big as Vanguard is hardly going to pivot the whole company to become a big tadpole in the small pond that is Australia's super market. If Vanguard has about $60 billion in institutional super fund mandates, they'll need to build a near- $40 billion super fund to replace the revenue. This is based on Rainmaker's prophecy they'll charge total fees at a market leading and vapour-thin 0.5% pa, split, say, 0.3% pa to investment management and 0.2% pa or about $2 per week to administration. From a standing start they'll have become Australia's 12th biggest super fund and attract more contributions than AustralianSuper, Aware Super, Sunsuper, Rest and QSuper combined. This is equivalent to the entirety of contributions paid last year into all retail super funds. And unless Vanguard wants to enter the MySuper default fund market, all this will have to be done voluntarily by members. That is, through active opt-ins. Showing how tough this job will be, Vanguard will have to become more than 15-times bigger than the entire disruptor super fund sector. The disruptor super product space comprises only $2.5 billion. And while Vanguard as an investment manager plays way above its weight among SMSFs, given contributions into SMSFs have dropped like a stone by 60% in the past three years, it's unlikely to get much comfort from them. Where Vanguard Super could shine, however, is if it attracts hordes of fund members disaffected by super funds likely to fail the looming APRA investment performance test. Last financial year, while their growth ETF ranked only 20th among super funds, their balanced ETF would have easily ranked number one; and this is after Rainmaker made allowances for super taxes and administration fees. Putting all this together, blind Freddy can tell you Vanguard Super will likely become Australia's biggest super disruptor product. But creating enough momentum to make up for foregone institutional mandate business will take longer - much longer. But where Vanguard Super could really wreak market havoc is if it changes expectations about what a post-modern super fund should look like. Imagine a retail Australian version of the $850 billion US Thrift Savings Plan. Thrift serves six million US government employees and military personnel, built on lifestage products underpinned by ETFs managed by BlackRock and State Street. It charges total fees of less than 10 basis points and in 2019-20 earned 2.5%, compared to the -0.9% earned by the Australian Rainmaker MySuper Index. GiddyupRead more

RIP superannuation group insurance?

ALEX DUNNIN

It's time for super fund group insurers to start panicking. The government, and hence the financial regulators whose job it is to enforce the laws and regulations they decree, no longer sees insurance ... It's time for super fund group insurers to start panicking. The government, and hence the financial regulators whose job it is to enforce the laws and regulations they decree, no longer sees insurance through superannuation as a game-changing killer-app that every super fund member should get access to. They see insurance as nothing more than a cost to be minimised. For super fund insurance advocates, and group insurers themselves, long used to celebrating insurance through superannuation as one of the best elements of any super fund, this fall from rooster to feather duster must be a savage whiplash-inducing jolt. It seems only a few short years ago that APRA was defending insurers so intensely that APRA may as well have been in their marketing teams. But then came the humiliation of the Royal Commission into Financial Services and the superannuation policy re-set it triggered. Roll-on to 2019 and the Protecting Your Super legislation, it was like the government and the regulators had declared war on super funds that for years had been allowing inactive members' accounts to be drained - as the law required - paying for insurance they either didn't need or didn't know they had. While this legislation attracted lots of criticism from the superannuation and insurance sector, it's pretty hard to argue the reform wasn't a good idea. Rainmaker analysis of APRA's data on group insurance premiums paid by members through their superannuation accounts shows that in 2019-20 the amount they paid in premiums fell a whopping 15% to less than $8 billion. That's a drop of $1.4 billion in just one year. Marking this as a fault-line, this is the first time ever that superannuation group insurance premiums have fallen. Long-gone are the halcyon insurance days of 2004-15 that saw group insurance premiums grow an average 18% pa. In the years since, 2015-20, premiums have increased only 1% pa, not even keeping up with inflation. But signaling that this 15% fall might just be the start of a rout, the regulator has just written to all RSE licensees announcing a major crackdown on superannuation insurance so all-encompassing that it spans everything from demanding premium price stability, to better data from insurers, to improved tender practices, to a fundamental re-set in how insurance should be designed and priced. And if that isn't frightening enough for superannuation insurance advocates, APRA is demanding in their proposed revisions to SPG 250 that not only must superannuation RSEs make it easier for fund members to opt-out of their insurance arrangements, RSEs must be able to demonstrate that the premiums they are imposing on fund members are reasonable and that they won't "inappropriately erode the retirement income of beneficiaries". Combined with the possible implementation of the Your Super Your Future legislation that, if passed by the Parliament, will force RSEs to prove their insurance arrangements are in 'the best financial interest' of fund members, SPG 250 is a guidance with teeth so razor sharp they will tear apart any super fund board naive enough to get in its way. This is because insurance premiums by definition erode members' retirement savings. To prove this erosion isn't "inappropriate" might not always be an easy argument to make. So it's game-over for super funds setup only to provide insurance and it's game-over for super fund group insurance policies that aren't priced as sharply as absolutely possible. Whether it's game-over for all non-competitive superannuation group insurers, or for superannuation group insurance itself, only time will tell. But from where I'm standing, the view doesn't look pretty.Read more

Do the Fauci

ALEX DUNNIN

It's time to dispel some of the mythology around financial illiteracy, disengaged fund members and how consumers are supposedly incapable of digesting complex information and making smart decisions. It's time to dispel some of the mythology around financial illiteracy, disengaged fund members and how consumers are supposedly incapable of digesting complex information and making smart decisions. Just look at how millions of Australians from all works of life, backgrounds, creeds and colours almost overnight became armchair pandemic, immunology and public health experts. There's hardly a household, schoolyard, workplace, bus and backseat of a taxi where the talk these past 12 months hasn't centred around 'flattening the curve', how we need to get R below one and the interaction between community transmission and the Covid virus' incubation period. State border closure and travel restrictions have also sparked a few million Australians to become amateur constitutional experts. Australia's new obsession with public health has made celebrities of chief medical officers and epidemiologists around the country. Most Australians probably didn't even know Australia had a CMO let alone one in every state and territory. And while Australia has the ABC's Dr Norman Swan as its chief Covid explainer, who probably has a higher trust rating than almost anybody across the nation, the creme de la creme is the United States' Dr Anthony Fauci, the director of the US' National Institute of Allergy and Infectious Diseases. Dr Norman Swan is a brilliant communicator, broadcaster and producer. But Dr Fauci has the edge because he's not just a commentator but an actual scientist, and an accomplished one at that. Plus on top of being an excellent communicator, he's a policy player - meaning he's often in the room when the big decisions are made. In a recent Australian podcast put together by the University of Melbourne, where Dr Fauci gave an extended interview, while what he was saying about Covid, how to manage it and how the vaccine would be developed was fascinating enough, what really made an impression was when he started talking about the communication process itself. To paraphrase: My job is not to be the smartest person in the room. Lots of experts think that is their job and unfortunately, because they are bad communicators, the politicians and policymakers they are trying to advise find it difficult to understand them. Dr Fauci went on: These experts then too easily get dismissed as boffins, leaving the politicians and public officials they are trying to advise vulnerable to being influenced by crackpots. He summed up, saying: My job is to try to explain to the politicians and officials I'm advising what is going on and persuade them to make the best, and often tough, decisions. To put it even more simply: the best expertise and research is pointless if the people you're trying to persuade don't understand and respect you. All of us in and around the superannuation ecosystem should think long and hard on this. Starting with those who right now are baffled by the government's superannuation policy agenda or who are trying to brow-beat the regulator APRA over their performance test formula. Same goes for all those financial advisers who know best as to why their regulators are inept. The superannuation ecosystem of course needs experts, and if they present even complex information the right way, they'll be amazed how well many millions of Australians will respond to it. But what we don't need is patronising intellectual arrogance and expert advisers who can't get their point across. We need to do the Fauci.Read more

Let's talk about Future Super

ALEX DUNNIN

The only thing worse than being talked about is not being talked about. And people sure like talking about Future Super. It's been the target of full-frontal assaults in the business and investment ... The only thing worse than being talked about is not being talked about. And people sure like talking about Future Super. It's been the target of full-frontal assaults in the business and investment industry media, and just recently, was asked to appear before the parliamentary Standing Committee on Economics. But for all the attention, it's hard to fathom precisely what is the allegation other than Future Super implements its bespoke investment strategy using a custom-built exchange traded fund (ETF). It's pretty easy to see what might be motivating some of the attacks. From a standing start five years ago, by 30 June 2020, its three investment options ranked, after all fees, first, third and forth over one year, and its flagship Balanced Impact investment option ranked tenth over five years. Its flagship balanced option is both Australia's best risk-adjusted balanced fund and best risk-adjusted ESG fund. If it was a MySuper product, it would have been number one in that sector too. Contributions into the fund in 2019-20, according to the superannuation regulator APRA, were up almost 8-fold in four years to $65 million. In 2019-20 its membership growth rate was Australia's third fastest of any fund. And even though it's Australia's 76th biggest fund, its member growth ranked tenth. So Future Super is a fund that plays way above its weight division. But despite this, its funds under management footprint remains tiny. Sure its $550 million under management at June 2020 sounds a lot, but it was only 0.04% of all the superannuation regulated by APRA. Nevertheless, its share of all contributions being almost 3-times its share of all FUM points to where it's heading. And what's happened to the fund in the six months following the close of the 2019-20 financial year bears this out. Latest financial data from Future Super reveals the fund by end December 2020 climbed above the $1 billion threshold. Future Super is thus a serious threat to superannuation's establishment and it's naive to not expect it to be attacked. But if its critics want to land any of their punches they are going to need to do a much better job learning about how the fund works. Future Super uses an ETF to implement its investment strategies for equities and two-thirds of its fixed interest because ETFs are highly efficient; hint, that's the whole point of why ETFs are taking the investment world by storm. Anyway, Future Super's total investment costs at 0.32% are about average for indexed equities strategies. But not all ETFs are passive. Someone should tell the critics that to be an ETF is just a statement about how a fund is distributed; it has nothing at all to do with its investment strategy. Active investment strategy ETFs now account for 8% of ETF funds under management and 18% of the 180 ETFs available in Australia. There are meanwhile no laws about what ETF fees should be and critics need to stop assuming ETFs are automatically passive and cheap. Future Super is simply using ETF structures to house 620 of the securities it invests into, which is why its ETFs were specially built for them. Other investors liked the the concept so much they also joined in, which is why Future Super now accounts for only about one-third of the money in these ETFs. It's also why the fund has 12 investment professionals to monitor the portfolio and ensure the stocks and bonds in it satisfy its screening criteria. It's a fair question why Future Super needs 12, but let's ask other funds why they need even bigger investment teams. Anyway, not all the fund's investments are through the ETFs and part of the job of these investment specialists is, as the members would expect, also monitoring these other investments. Challenging Future Super as to why, as an ethical super fund, it invests into a company like Cleanaway Waste Management, as did the Chair of the Standing Committee on Economics, Tim Wilson MP, is meanwhile not an attack but a compliment. Let's not forget that we can hurl these questions at the fund because it is one of the few that declares its portfolio holdings. Future Super does, however, have a weakness: fees. While its Balanced Index investment choice has total fees of 1.1% pa, placing it in the cheapest third of all balanced products, its flagship Balanced Impact investment option has total fees of 1.7% pa, placing it just within the most expensive third. But the Standing Committee's deputy chair, Andrew Leigh MP, should appreciate that these fees would make Future Super Balanced Index cheaper than 60% of all MySuper products. And of the 52 MySuper products that would be more expensive, 33 of them are industry funds. What then is the lesson here? Easy. Super funds need to get better telling their story and explaining themselves. And critics need to do better research before launching their attacks.Read more

Lifecycle super's ticking clock

ALEX DUNNIN

Lifecycle super started with so much promise and such a compelling value proposition. When you're young you have plenty of time up your sleeve and can afford to take investment risks to reap long-run ... Lifecycle super started with so much promise and such a compelling value proposition. When you're young you have plenty of time up your sleeve and can afford to take investment risks to reap long-run investment rewards. When you're older, you're concerned about protecting your superannuation capital, so you want your money invested conservatively. We learned this in the Global Financial Crisis of 12 years ago when many older superannuation fund members, particularly those who were naively invested into non-diversified equity portfolios, suffered huge superannuation losses. Recall that back then the MySuper default index crashed to an awful -22%, leaving a scar on the minds of millions of superannuation savers that would last a generation. Lifecycle superannuation purpose-built to stop this ever happening again seemed the perfect 'you-can-have-your-cake-and-eat-it' solution. It was enough to make many of us ignore the implicit opportunity costs lifecycle investment strategies bake-in. Like the power of compound interest, but in reverse. Superannuation 101. As you get older, say around your late 40s and your account balance starts building momentum, those annual performance returns exponentially supercharge your savings growth. But lifecycle superannuation products dial-down fund members' investment risks, pushing them into low return conservative investment strategies that put on the brakes just as the superannuation Ferrari is turning into the home straight. The impact of this, according to analysis published by Rainmaker late last year, was that the typical member of a lifecycle MySuper product, if they were to get age-based index returns through their working life, would retire at age 70 with 22% less than a typical member of a single strategy MySuper product. This 22% lifecycle gap is just as massive as the savings gap we use to scare super fund members regarding why they should run a mile from high fee superannuation products. The villain here is not lifecycle investing per se but the low returns they, as a group, deliver. MySuper performance results published by Rainmaker routinely shows that too many lifecycle products fail to deliver their promise. While lifecycle products are meant to get high returns when members are young, as at June 2020, the only age cohort for which the lifecycle performance index beat the single strategy index over five years was for members younger than 20. Meaning that the only members getting the positive effect of lifecycle investing are those with pretty much no money in their accounts. Older members five, 10 or 15 years from retirement meanwhile got index returns only half what the single strategy index delivered. Sure it makes sense for pre-retiree fund members to get lifecycle index returns lower than they'd get from the single strategy index, but for it to happen to younger members too means something went horribly wrong. Not for all lifecycle products mind you. Just among those suffering repeat low performance, some of which are Australia's lifecycle power brands. You know, the ones that used lifecycle investment strategies in the years following 2013 to reboot their default superannuation credentials. Showing the extent of the problem, while there is normally a 2:1 ratio gap between the best and worst performing lifecycle products for each of the age cohorts younger than age 40, for members in their 50s and 60s the ratio gap explodes out to 3:1. In other words, just when members are approaching retirement and they need every last drop of investment performance juice they can squeeze from their superannuation, they are being punished by underperformance on a grand scale. And it's not just Rainmaker saying this but the performance test-enabled regulator APRA. Just look at their latest MySuper heatmap, if you need any convincing. The colour mosaic it paints of the lifecycle sector compared to the one it paints for single strategy products is not a pretty sight, unless of course you like orange and red. Lifecycle advocates have in the past tried to defend themselves against these claims naively saying you can't compare lifecycle products. But that lame dog just ain't gunna hunt no more. With an emboldened under-pressure regulator looking for sacrificial funds to hang out to dry in the public square, low performing lifecyclers don't have much time to turn this around.Read more

Yeah, yeah, whatever

ALEX DUNNIN

A former Commonwealth minister for superannuation once told me that you can tell a lot about an industry by the things it complains about. Industry representatives have as much right as everyone else ... A former Commonwealth minister for superannuation once told me that you can tell a lot about an industry by the things it complains about. Industry representatives have as much right as everyone else to advocate for their members, being in the main incumbent industry participants. Just don't confuse this advocacy for industry participants with what will help the end consumer being fund members. The latest example of this is the reaction to the Your Future, Your Super package of reforms just announced in the 2020-21 Budget. Like all such reform packages, most of the measures make sense and will likely be widely supported. But there's always a few stings in the tail. Trouble happens when industry advocates drink their own Kool-Aid as they disappear into a space-time vortex of molecular policy dissection producing their endless papers criticising the measures without proposing much that is better. Monday morning quarterbacks. Stirring the chooks this time is the methodology formula Treasury says APRA will use to benchmark MySuper product performance. It must be said, however, that someone in Treasury thinking it would be a good idea to publish such a formula containing symbols such as ∏, }, ∑ together with super and subs scripts is both absurd and hilarious. But while the formula looks terrifying, for anybody unlucky enough to not have been a student in my mathematics classes when I was a school teacher, all it's trying to say is that APRA will compare the overall performance of each MySuper product against a weighted average of asset class indexes. These indexes will of course be adjusted for estimates of fees and taxes. It will no doubt be a massive transition for APRA to go from being an esoteric prudential regulator to soon having to pass judgement on specific super funds and declare who among them should be kicked off the island. Indeed, the really fascinating part of these Budget reforms will be how the regulator handles their new role. This may seem an amazing piece of interventionist financial regulation, but I wager that millions of super fund members in Australia would be gobsmacked to learn that super funds have never before had to pass such a performance test. This makes the real surprise of the reforms, not how the formula works, but that we've never had one before. Which means the more super funds, or more correctly, their advocates, whinge about the specifics of the formula, which index should be used and over what time period, the more it vindicates why this performance test is long overdue. So the next time someone complains to me about the formula, my response will be simple: yeah, yeah, whatever. If you want to know why Rainmaker is taking such a hard line, here's the reason. Super fund investment options perform so badly. Two-thirds of Australian equities investment options failed to match or beat their asset class benchmark over three or five years. For international equities options the underperformance rate was abysmally worse at 97%. For property it was thankfully more respectable at 50%. For cash it was only 10%. For fixed interest, you don't want to know. Sure, Australia's super funds seem to have strong kung fu when it comes to mixing asset classes, but within the asset classes themselves, all I can say is that while many are called, few are chosen. And all this brings us back to super fund trustee boards. None of this should surprise any one of them. But if it does then this, again, vindicates why the regulator albeit at the behest of the government and Treasury, needs to finally be much more proactive. It goes without saying that if super fund investment managers can't consistently beat their asset class indexes then funds should switch en masse to indexing perhaps using white-labelled ETFs. Or they should shut down their investment options. Either that or expect to be hauled before the Federal Court. Rest's trustees might have dodged a bullet in their recent ESG case, but the really scary court case that could literally tear apart superannuation fund business models will be one that challenges their investment menus.Read more

Big Super bad egg?

ALEX DUNNIN

"Dedicated to the workers of Australia." So begins Senator Andrew Bragg's latest book 'How to fix super: Bad Egg', a 120-page monograph, launched just a few weeks ago in June, that ... "Dedicated to the workers of Australia." So begins Senator Andrew Bragg's latest book 'How to fix super: Bad Egg', a 120-page monograph, launched just a few weeks ago in June, that has lit a fire under Australia's superannuation establishment. That a short book written by a first-term backbencher, albeit one as highly credentialed as a former Liberal Party national director, policy adviser to the Financial Services Council and the Business Council of Australia, who already is a chair of a parliamentary committee, has had this impact speaks volumes to how vulnerable is the superannuation sector right now. Yet who could blame it for feeling under pressure. It's had a tumultuous year defending fund members from the challenges of COVID-19, dealing with massive regulatory reforms and then it had to administer the Early Release of Superannuation (ERS) scheme that has so far seen $33 billion in hardship payments go out to about one-quarter of the workforce. What has arguably worn them down more, however, is that some of the sector's most fundamental tenets of faith are being openly re-contested. The legislated timetable for rises in the Superannuation Guarantee rate are likely to again be slowed and the Government has redefined superannuation's purpose so it isn't just for retirement but it can be called on in times of national emergencies. The sustained nature of some of the criticisms heaped on the superannuation sector has led a few of its advocates to counterattack the senator personally notwithstanding he can be a stirrer in his own right who is also an experienced media performer able to defend himself. Former prime ministers Paul Keating and Kevin Rudd even held a joint media conference to defend current superannuation policy, denounce its critics, and rip into him. Before I turn to the substance of the book, it must be said Senator Bragg isn't easy to tag. Yes he's an economic dry but he's also surprisingly progressive. In 2017, as national Liberal Party director he led their Yes campaign in the Marriage Equality postal plebiscite campaign, he campaigns actively in support of indigenous Australians and during the 2019-20 NSW bushfire emergency was one of few politicians speaking sense and using the power of their office to get resources to desperate people who needed urgent help. But why is the book is getting so much attention? My take is simple - the superannuation sector is not used to being attacked on the left by someone from the right. This line of attack happens across a few fronts. First, by labelling anyone from large industry funds or their associations as Big Super bunches them together with their retail rivals, undermining the clean bill of health they got from the recent Royal Commission. Second, it uses the superannuation sector's own words to pincer it on efficiency, effectiveness, fairness and gender equality. Thirdly, it argues that compulsory superannuation is one of Australia's biggest ever economic initiatives yet is poorly understood and not properly benchmarked. Does this mean the senator is trying to tear superannuation down? In my view, no. But he definitely wants it reformed, but so too do most people who work in the sector. Which is why he's asking some very direct, simple questions of the superannuation sector that are proving surprisingly difficult to definitively answer. For example, if people in superannuation are going to infer you need almost $1 million in superannuation to retire comfortably, the fact that only 7% of people achieve this milestone means the system isn't working. If superannuation is meant to get people off the age pension, is it working when despite having $3 trillion in superannuation savings Australia still has two-thirds of retirees on the age pension with two-thirds of them on the full rate? The superannuation system costs $80 billion a year to run, made up of $40 billion in tax subsidies most of which goes to high income earners, $30 billion in fees and $10 billion in insurance premiums. What's the evidence it delivers more than it costs? Is it fair to force young people and low-income people, many of whom are women, to save 9.5% of their wages in superannuation if they can't afford to buy their own home meaning they'll likely retire into poverty? The book meanwhile argues that even if SG was 12% it would still be inadequate. Sure the book contains some simplistic analyses. But to dismiss it because you don't like its author is a reform opportunity missed. Doing that will just vindicate why this book needed to be written.Read more

Dial down the fiduciary climate emergency

ALEX DUNNIN

Climate emergency. Bushfire crisis. Whatever buzz word a superannuation fiduciary wants to use to galvanise their trustee board into 'climate action', they need to calm down, slow down. It is not their ... Climate emergency. Bushfire crisis. Whatever buzz word a superannuation fiduciary wants to use to galvanise their trustee board into 'climate action', they need to calm down, slow down. It is not their job to fix climate change, and in anycase, they won't and they can't. Not any more than they can fix societal problems like gender and social inequity, stop domestic violence or sponsor the magic bullet nation building infrastructure project that will rescue Australia from itself. Fiduciaries who think this is their job should either run for parliament, get a job at the CSIRO or start a special purpose investment vehicle. The job of superannuation fiduciaries is instead to identify financial risks and take them into account when designing, constructing, implementing and monitoring their investment strategies and portfolios. Risks associated with changing climate are of course part of this risk matrix. But the risk list also includes capital market risks, regulatory risks, technology risks, and geopolitical risks, among others. The tricky aspect to this is that the complete list is impossible to write down because no one knows them all or what it will include next year or the year after. This is why trustee boards are made up of fiduciaries in the first place, not technical experts. Wise, multi-disciplined, prudential fund overseers each with a single-minded focus on protecting and indeed maximizing the best interests of their fund members. Being ideologically driven is not part of this mission description, irrespective of what it is and how noble the trustee believes their intentions to be. Setting the parameters for all this is of course the Sole Purpose test: everything the fund does must be focused on providing their members with retirement benefits. That is, it's a financial constraint. Do anything that takes potential retirement benefits away from your members and you breach it. This doesn't mean funds can't invest in ways to promote societal benefits. It just can't be the primary focus. Maximizing retirement benefits should be. These constraining rules don't apply if a fund trustee or executive is running their own money or running non-superannuation money sourced for this purpose. But being a superannuation fiduciary is different because of its bigger responsibilities. So when a super fund is lambasted in the mainstream media by an activist political group for having coal companies in their portfolio we need to put this criticism into perspective. It's activist politics designed to provoke. Super fund fiduciaries responsible for running portfolios with tens of billions of dollars in investments in them meanwhile should be savvy enough to handle these political attacks. This means that when we judge a super fund's so-called climate policy credentials, we do not judge them against a pure ideological philosophical benchmark, but against a multi-layered mix of parameters that includes investment outcomes. Let's not forget that a super fund can't be a good climate change fighting fund if it's not a good super fund. Funds of course need to be good corporate citizens that invest in ways that protect the long term best interests of their members. And if they claim climate change or broader ESG credentials they will be called out if they don't live up to their rhetoric. But the primary criteria on which they be judged will always be returns, fees, insurance value, governance, communications and operations.Read more

Oh to be a super fund trustee

ALEX DUNNIN

Super funds are run by trustees. They are the fiduciaries, they are who the regulators come for when something goes wrong. Executives don't run funds, they work for the fund chief executive who is appointed ... Super funds are run by trustees. They are the fiduciaries, they are who the regulators come for when something goes wrong. Executives don't run funds, they work for the fund chief executive who is appointed by and responsible to the fund trustee board. Trustee boards can, and they often do, outsource a multitude of tasks. But they never outsource responsibility for those tasks. No matter how technical those tasks may be. This may seem Superannuation Trustee Law 101 but with superannuation operations becoming so complex, there can be a tendency for some superannuation executives and outside experts to think they are in charge and that the only good trustee is one who's also a technical expert. Trustees who do what they're told are even better. It's a bit like technical experts bemoaning politicians who don't make the legislative decisions they want or if legislators expect new laws to be quickly implemented. They should refresh their understanding of how Australia's parliamentary democracy works. ASIC, which now appears to be Australia's lead superannuation regulator, in November launched court action against trustees of a super fund that has an arrangement with a promoter of investment options held within that super fund. That's right, court action, not an Enforceable Undertaking or a fine and correction. They have since followed up with direct statements and media comments. In doing this ASIC is sending an unambiguous crystal clear message to all superannuation trustee boards and the Registrable Superannuation Entities they govern. Just as they are responsible for the service providers they appoint, they are responsible for the promoters they contract. Rainmaker has identified 19 superannuation products operating under similar arrangements spanning $2.3 billion in super assets in 2019. While this represents a miniscule 0.1% of Australia's superannuation system, it has been the business model used by most of the new super products launched in the past three years. If ASIC's action is successful it could have a big impact on this new sector of the superannuation market. But it's not just these challenger superannuation disruptors and the funds that enable them that will be watching this case. Any fund that uses third-party distributors has just as much skin in the game. This includes retail wealth groups using intermediaries (aligned or not), industry funds using unions to represent them on worksites, and any fund using an aggregator platform, especially if that platform is remunerated by clipping the ticket on account roll-ins. Only the most naive trustee boards would not be expecting APRA to follow ASIC's lead. In response trustee boards are about to get a whole lot more assertive to cover themselves and the executives who work for them and distributors associated with them would be wise not get in their way. Arguments about the need for more independent trustees have meanwhile become irrelevant. The caravan has moved on.Read more

High growth, high cost, high returns

ALEX DUNNIN

Here we go again. The Future Fund releases its annual performance results and a swooning media is infatuated. First some background. The Future Fund was set up in 2006 by the Howard government as a sovereign ... Here we go again. The Future Fund releases its annual performance results and a swooning media is infatuated. First some background. The Future Fund was set up in 2006 by the Howard government as a sovereign wealth fund to help build up capital reserves that would eventually be used to pay down previously unfunded liabilities of Australia's Commonwealth government defined benefit superannuation schemes. These liabilities in 2018 amounted to an estimated $210 billion, meaning 75% of the liabilities for now are covered. The Parliamentary Budget Office reported in 2017 that these liabilities are yet to reach their 2040 peak of $300 billion. The Future Fund Management Agency (FFMA) is the public sector agency that manages the Future Fund. It reports to parliament appearing before the Senate Standing Committee on Economics. The FFMA also manages another $36 billion from five other special purpose funds. While the Future Fund was setup to cover superannuation unfunded liabilities it is not a superannuation fund, but a budgetary fiscal fund. It has no members, and has just one stakeholder being the Australian government namely the Department of Finance. It pays no tax in Australia. As it not a super fund it is not governed by trustees, and is not subject to APRA or ASIC. No doubt this is why its directors are enigmatically called "guardians". This structure makes the Future Fund akin to an investment vehicle and the FFMA a multi-asset funds manager. The FFMA being Australia's biggest funds manager begs the question: is it any good? At face value the answer appears a resounding yes. But dig below the surface and the answer becomes more complex. The first conundrum is that, according to their 2018 annual report, the Future Fund with a cost ratio of 1.57% is expensive. This is twice the price of many market leading MySuper products, and they have millions of members and administration costs. At least the FFMA seems to be trying to fix this. Between 2016 and 2018 they slashed their investment manager costs 9% even though FUM increased 18%. Now let's shift the focus to investment returns, which in 2019 were impressive. Its 11.5% headline return was more than one and a half times the 7.1% MySuper benchmark index. Its 10.4% pa return over 10 years is 200 basis points above the 8.4% pa MySuper 10 year benchmark. But comparing raw Future Fund and MySuper returns is erroneous. One is a large scale institutional funds manager, the others are more complex, consumer-facing, complying funds. Moreover, while the Future Fund was set up in 2006 it didn't start seriously deploying cash for another three years well after the GFC had passed. In 2008 its cash weighting was 56%, in 2009 it was 41% but in 2010 it plummeted to 13%. Yet even after Rainmaker attempts to level the playing field by applying a low nominal income tax rate of 6% and a similarly low 0.3% administrative overhead, the Future Fund still scrubs up well outpointing the MySuper index almost 350 basis points. Indeed if the Future Fund was a MySuper product this year it would rank number two behind only QSuper. Over five and 10 years it would rank numero uno. Over three years it would however rank 29th. What makes its 2019 result so startling is that in 2018 its adjusted return ranked an abysmal 57th although by five year returns it came in at a more respectable 15th place. So what caused 2018-19 to be the Future Fund's breakout year? It flicked the switch to private and emerging equities markets, that's what. Its private equity holdings jumped 25% and its EM equities holdings jumped 54%. These two asset classes that in 2018 made up only 22% of the Future Fund's portfolio accounted for two thirds of their 2018-19 FUM growth. This is part of a longer run story. In the past five years the Future Fund doubled its private equity holdings to $26 billion or 16% of the fund, and lifted its holdings of non-mainstream assets 67% to $60 billion or 37% of the fund. These assets now account for almost half its 79% apparent growth asset weighting. Giddyup.Read more

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